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YIT Creditors With No Choice Accept Plan That Leaves Bonds Junk

YIT Oyj bondholders accepted a plan that left their debt junk rated after the Finnish builder said its proposal wasn’t open to discussion.

Creditors approved raising the annual interest by as much as 55 basis points on notes due 2015 and 2016 in compensation for a split in the company’s operations, according to a statement to the Helsinki Stock Exchange today.

In exchange, bondholders agreed to waive claims on assets in a new company created through a spinoff, in the event of a default. Investors could either pass or reject the proposals at today’s meetings, and weren’t be able to make a counter offer.

“It was the best of bad options,” said Juuso Rantala, portfolio manager at Aktia Asset Management, who helps manage about $10 billion in bonds and stocks and has already sold some of his YIT debt. “The compensation is absolutely inadequate. While it may be enough to compensate for the drop in market yields, it doesn’t compensate for the weaker credit quality of YIT after the spinoff.”

The bondholder outrage coincides with efforts in the region to improve companies’ access to debt markets as bank credit grows more costly and businesses in the northernmost euro member are struggling to find growth. Finland has yet to adjust to the decline of its flagship company, Nokia Oyj, while its forest industry continues to founder. A gauge measuring Finnish business confidence has remained below zero since August 2011.

The Sting

In its split, YIT will keep construction services, which accounts for about 40 percent of its 4.7 billion euros ($6.1 billion) annual revenue, and spin off maintenance into Caverion Oyj. Shareholders get one Caverion share for each in YIT stock.

“Large bond investors, who simultaneously are large equity holders, had an interest to see the demerger completed because of their equity investments,” said Juhana Heikkilae, senior portfolio manager who helps manage 3 billion euros of fixed-income investments at Evli Bank Oyj in Helsinki, including YIT bonds.

“The reason why this split stings so much is that the story YIT has been telling bond investors -- that they’re a company with two business lines balancing each other -- has now shattered entirely,” he said. The company should have offered to pay out 150 basis points, he said.

As compensation, holders of YIT’s 2015 notes will get 50 basis points more annual interest as the coupon is raised by 86.8 basis points to 5.691 percent, according to the company’s proposal. Owners of the 2016 bonds will get 55 basis points more annual interest and an increase of 81.7 basis points in the coupon to 5.567 percent. A basis point is 0.01 percentage point.

Yields Jump

YIT also offered to buy back outstanding floating-rate bonds. About 42.6 percent of holders of bonds due in March 2014 tendered their holdings, leaving 28.7 million euros outstanding, while 24 percent of those with about 25 million euros of September 2016 securities grabbed the offer, the company said yesterday. About 0.2 percent of YIT’s August 2014 notes were tendered, leaving 49.9 million euros outstanding.

YIT’s bond yields jumped after the plan was announced on Feb. 5 as the Helsinki-based company initially offered no compensation to creditors.

“The big problem is there is no room for negotiation,” Rantala at Aktia said before the meeting. “The company should have discussed an appropriate level to pay out with investors beforehand.”

YIT declined to comment, according to Hanna-Maria Heikkinen, vice president of investor relations.

High-Yield Credit

The difference in yield on YIT’s 4.75 percent 2016 bonds and the euro swap curve widened to 309 basis points on May 13 from a low of 231 basis points on Jan. 17, before the spinoff was announced. It narrowed to 284 basis points today. Its 4.823 percent 2015 notes trade at a spread of 263 basis points to the euro swap curve.

YIT, which doesn’t have a rating with Standard & Poor’s or Moody’s Investors Service, will lose its investment-grade shadow rating at Danske Bank A/S because of the spinoff, said Asbjoern Purup Andersen, a senior analyst based in Copenhagen.

“We placed the rating on negative watch following the demerger announcement,” he said. “We expect to lower our indicative credit rating approximately one notch to BB+ from BBB-.”

Bondholders have no say on the split, which shareholders will vote on at an extraordinary meeting on June 17. The planned listing of Caverion’s shares on Nasdaq OMX Helsinki is July 1. Juhani Pitkaekoski will become chief executive officer of Caverion, while Kari Kauniskangas takes the top job at YIT, the company said on May 3. Not all creditors were planning to fight the offer.

No Contest

“The floating-rate notes traded below par before this announcement, so it’s certainly an upside to those bondholders,” Andersen said. “Opposing bondholders could get redemption at par according to Finnish regulations and the redemption price of the tender offer is slightly higher than that.”

The payout for the fixed-rate notes is adequate as the loan maturities are short, said Pontus Soramaeki, portfolio manager at Alandsbanken Asset Management, who helps manage 1.7 billion euros in investments, including YIT bonds.

“We will vote in favor of raising the coupon,” he said by phone before the meeting. “It’s a step in the right direction.”

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